ITA's approach

With the reply to ruling No. 507 of 12 October 2022, the ITA took the position that utility tokens, whose nature changes after they are issued, are to be considered as "entitlement documents" under the Italian Civil Code and, therefore, their transfer does not fall within the VAT scope. 

In more detail, the ITA clarified that such utility tokens cannot be treated the same way as traditional vouchers for VAT purposes. 

The ruling concerns a company active in the protection of copyright of musical works, through the blockchain authentication process. Such a company, in order to raise funds, issues utility tokens, which allows the holder to deposit their works benefitting from a discounted price for the relevant service. The issuance is expected to take place through a platform that will enable pre-sale and trading of the token.

According to the ITA, such utility tokens are not to be considered in the same way as traditional vouchers for VAT purposes, as they can change in their nature and turn, in case of non-utilization, into a virtual currency and be negotiated on a secondary market against a profit (unlike vouchers whose purpose does not change in case of non-utilization).

The ITA qualify such utility tokens as hybrid tokens and, therefore, as a type of legitimation documents under Article 2002 of the Italian Civil Code, which gives the holder the right to obtain, from the issuer, a service at a reduced price. When such utility tokens are utilized, the supply of services is then subject to VAT at the specific rate provided by the law. 

With reply to ruling No. 508 of 12 October 2022, the ITA addressed the topic of cryptocurrencies, providing some guidance about various aspects related to mining, analyzing, among others, the VAT profiles.

Such mining activity consists in the "mining" of cryptocurrencies, materializing, on a practical level, in a validation process aimed at the creation of virtual coins.

The process, in particular, is based on so-called proof-of-work, consisting of the resolution of a complex system of operations in the relevant blockchain using computing power (through the use of hardware and software) provided by a miner. 

The model provides for two alternatives, i.e., the miner can act independently ("solo mining") — if it connects directly to the blockchain of the algorithm it intends to "mine" — or in an associated form ("pool mining") — if they join a group (pool) to increase the calculation capacity and the probability of resolution.

The miner's remuneration, subject to the effective validation of blocks, consists of the allocation of cryptocurrencies. However, it may happen that the work performed does not lead to the resolution of the operations necessary for such validation and, consequently, is not remunerated.

From a VAT standpoint, the ITA pointed out that the miner's "reward" is attributed automatically by the "system/network," given that the underlying technology is characterized by the absence of a party that can be considered a principal/recipient of the service. This is the case even in the event that it is received through the pool, since the pool's identification "is limited to the IP address through which communications are made."

This has led the ITA to consider that the activity at issue cannot be subject to VAT. Such irrelevance derives, in fact, from the absence of a synallagmatic relationship, given that the service cannot be deemed to be "directly provided by the miner for the benefit of a recipient, whether determined or determinable."

Assuming that the mining is outside the scope of VAT, it follows that the VAT paid on purchases cannot be deducted.
From an income tax perspective, the ITA stated that the remuneration generated from the mining activity, paid in virtual currencies, concurs to the determination of the taxable base following the rules for remuneration paid in foreign currencies.

This means that the income is considered to be accrued in the year in which the taxpayer receives it and the increase in value during the tax period has to be taken into consideration in determining the taxable base for both corporate income tax and regional income tax.

With Ruling No. 515 of 17 October 2022, the ITA clarified that the impossibility of determining a "personalized service provision" to a specific beneficiary leads to the mining activity being considered as irrelevant for VAT purposes. 

Notably, the ruling at issue deals with a company carrying out mining activities on a particular blockchain: activity consisting solely of "building and securing of the network infrastructure and the transfer of device data," against which it is remunerated automatically by the system/network with cryptocurrencies. The ITA stated that the impossibility of identifying the existence of a "personalized" service provided by the miner in favor of a specific beneficiary, leads to consider mining as out of VAT scope as it is characterized by the absence of a synallagmatic relationship.

The miner does not have to collect VAT against the cryptocurrencies received by the network and, correspondingly, because it does not carry out taxable output transactions, it cannot exercise the right to deduct any input VAT. 

Because of the above, for such transactions, companies are not required to comply with any documentation, return and payment requirements under VAT provisions.

Conclusion

To date, in Italy the crypto assets phenomenon lacks a suitable regulatory and tax framework. The tax treatment is dictated by the layering of multiple positions of the ITA that deal with particular aspects of the matter, without an overall view, with risks of distortions that could undermine the taxpayer's legal certainty. Therefore, it is fundamental to review on a case-by-case basis the characteristics of the tokens and crypto assets, to be able to outline the applicable VAT and income tax treatment, consistent with the substance of the assets exchanged and the business model of the services performed. 

Before entering any type of activity or transaction on crypto assets, we would recommend reaching out to your Italian Baker McKenzie contact to review the potential tax impacts.